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Chapter 7 bankruptcy and your California inheritance

Once a California resident has made the decision to file for bankruptcy, the next step is determining the best time to move forward with the filing. The optimal timing is different for everyone, and depends on one's overall financial scenario. When it comes to maximizing the benefits of a Chapter 7 bankruptcy, proper timing can make a world of difference in the overall outcome.

One example of an issue that revolves around timing involves an inheritance. If the recipient of an inheritance were to file for bankruptcy after the money has been received, the total value of the inheritance would have to be claimed along with all other held assets. In some cases, receiving a sizable inheritance could disqualify an individual from the income qualification for Chapter 7 bankruptcy. In addition, once the inheritance has been received, state law will dictate how much, if any, of the inheritance you will be allowed to keep.

When an inheritance is expected in the near future, it may make more sense to hold off on filing for bankruptcy until after the asset has been received and spent in an appropriate manner. For example, using inheritance money to fund a retirement account or purchase life insurance are both valid expenses, and can allow a family to use their inheritance while also shielding it from the bankruptcy process. Of course, if the inheritance is large and the money spent in a wasteful or unreasonable manner, the issue may be called into question by the bankruptcy court.

This is just one of the many aspects of Chapter 7 bankruptcy that can pose a problem. The best way to maximize the benefits of filing is to fully understand the legal ramifications of various choices before moving forward. By making a strategic decision on when to file, California residents can get the most out of the process while retaining as many assets as possible.

Source:, "Will Bankruptcy Affect Inheritance Money?" Justin Harelik, Feb. 19, 2013

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